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Sunday, 18 March 2012

Egypt lays sukuk foundations

Egypt is solidifying rules and regulations that will allow companies to issue Islamic bonds, or sukuk, in an early sign it is positioning itself to tap into a boom in Islamic finance.

The North African nation will "by the end of June" finalise the executive regulations to allow companies to issue Islamic corporate bonds, or bonds that comply with the Islamic ban on interest, said Ashraf Sharkawi, the head of the Egyptian Financial Supervisory Authority.

Alongside a sovereign sukuk worth US$2 billion (Dh7.34bn) announced by the Egyptian ministry of finance last month, analysts say the regulator's move is ahead of the formation of an Islamist-dominated government expected to take office this year and an attempt to get a slice of the global sukuk market estimated to be valued at about $85bn.

Mr Sharkawi said the sukuk rules and regulations, which are still subject to approval from the prime minister, Kamal El Ganzouri, will help to boost liquidity on the Egyptian Exchange. The benchmark EGX 30 has gained almost 45 per cent in the year to date, making it the world's best-performing stock market after a tumultuous performance last year.

A law that better regulates sukuk issuance has been mooted for several years, but analysts say the move to enforce a clear law has become a priority after the revolution, considering an economic climate likely to be shaped by Islamic political parties.

The Freedom and Justice Party has been outspoken about its ambitions to promote Islamic banking alongside conventional banking, and in May last year, Ashraf Badr El Din, the head of the party's economic committee, first proposed the idea of selling Islamic bonds to plug the country's budget deficit.

At the time, Mr Badr El Din said that a high percentage of Egyptians had reservations about the charging of interest and that such a financing tool would encourage them to invest. "The Muslim Brotherhood are eager to expedite the emergence of Islamic products such as sukuk law issuance to attract Arab investors and close the country's deficit," said Shahinaz Rashad, the general manager and director of global Islamic finance at Metropolitan Consulting. "There is a growing trend towards the revival of Islamic finance in light of the prominence of Islamic parties."

Tapping into strong regional appetite for sukuk issuance, especially from the Gulf, is also a big driver for Egypt, said Mohammed Omran, the chairman of the Egyptian Exchange.

"We're finding a new category of investment that meets some investors' appetite or some investors' beliefs like Sharia compliance or ethical investing," Mr Omran said. "It's going to attract a lot of Gulf investors to Egypt boosting liquidity all round." A record volume of Sharia-compliant debt was sold globally last year, according to Zawya data. Sukuk totalling $84.4bn were sold in the period, an increase of 62 per cent from 2010. From that, $19bn, nearly 23 per cent of the total, was sold in the Gulf.

However, Egypt's Islamic finance sector is still in its infancy, with just three listed Sharia-compliant banks - Al Baraka Egypt bank, Faisal Islamic Bank of Egypt and National Bank for Development. Combined with the absence of enforced laws and regulations governing some Islamic financial instruments such as sukuk, analysts say it will be difficult for the country to forge a hub comparable to Bahrain and Malaysia, two of the world's most successful Islamic banking centres.

"Egypt could become one of the largest Islamic banking markets, but I'm not so sure if it will become a hub," said Abdul Kadir Hussain, the chief executive of Mashreq Capital, the investment and brokerage arm of Mashreq in Dubai. "In order to successfully become a hub you need infrastructure like tried and tested laws, settlement mechanisms and service providers, and Egypt has a long way to go before that," Mr Hussain said, although he added the country was likely to play a "major role as a user and provider of Islamic capital" in the coming years.

A skeleton sukuk law has kept investors and companies that have considered issuing the bond at bay, but early investor appetite suggests Egypt could be well on its way by the end of the year.

Adnan Ahmed Yousif, the president and chief executive of Al Baraka banking group, Bahrain's biggest publicly traded Islamic lender, which has a subsidiary in Egypt, said Egypt had potential for a vibrant sukuk market.

"We are trying to strengthen our relationship in the Egyptian market specially in Islamic products," he said, adding the government would do well to use the sukuk market for future borrowing needs.

He said the bank's Egyptian unit may sell dollar-denominated Islamic bonds, in the region of $200 million, in the fourth quarter of this year.

"If things go smoothly after June [when a president is expected to be elected], yes we will think about something in the fourth quarter," Mr Yousif said.

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